Investment Merits

• A beneficiary of the National Automotive Policy 2020 (NAP 2020)

• Structural growth trend for automotive electronic components

• Growing export customer base and EV exposure

• Undemanding valuation at only 7-8x forward P/E

Company Profile

MCE Holdings is a leading original equipment manufacturer (OEM) and  electronics manufacturing services (EMS) provider specialising in the  full spectrum of design, manufacture, and supply of automotive  electronics and mechatronic parts for the Malaysian and regional  markets. It currently has two operational facilities in Johor and Port  Klang, Selangor, employing over 500 full-time employees.

Highlights

Beneficiary of NAP 2020. Launched in early 2020, the NAP aims to  make Malaysia a regional leader in automotive manufacturing,  engineering, and technology. The NAP sets out three new elements – Next Generation Vehicles (NxGV), Industrial Revolution 4.0 (IR 4.0),  and Mobility-as-a-Service (MaaS) – on top of the existing framework to  shape the future of the local automotive industry and holistically localise  the supply chain. Among the targets outlined in the NAP 2020 are to  increase the total production volume (TPV) of vehicles to 1.47m (from  564k in 2018) by 2030, creating various opportunities for volume  growth. We believe MCE, which has experience in supplying  mechatronic and electronic parts to local automotive players over the  years, stands to benefit greatly from the various initiatives under the  NAP 2020, and the push for more locally assembled CKD models.

EMS and Tier 1 automotive supplier. Apart from TPV growth,  electronic parts and automobile components are also set to grow  exponentially in the next decade, driven by monitoring and safety  systems, infotainment, and onboard computers etc. As highlighted in  the NAP 2020, exports of automotive parts & components are set to  reach MYR28.3bn (2018: MYR13bn) by 2030. MCE aims to double the  existing floor space at its new plant in Serendah (built-up area of 117k  sqft) to cater for new projects and to support its automotive customers  in the proximity. There are also opportunities in the growing electronics  parts space and as local and foreign car manufacturers look to localise  or relocate their supply chains Malaysia or within the ASEAN region.  We understand that MCE has managed to enter the supply chain of a  major Japanese automotive brand and is looking to expand its capabilities to become a modular supplier.

EV the next growth engine. One of the NAP 2020’s objectives is to  develop an NxGV technology ecosystem to make Malaysia a regional  hub for the production of NxGV. EVs and autonomous driving are  gaining popularity, leading to a surge in demand for various components such as battery packs, battery management system  (BMS), converters, switches, sensors, and controllers. MCE has  successfully ventured into the EV space with its Manufacture License  and World Manufacturer Identifier (WMI) code to assemble emotorcycles in Malaysia. It has also won the contract to produce the LF  antennas for electric motocycles’ smart key systems in Indonesia.

Company Report Card

Results highlights. Following its turnaround in FY22 (Jul), MCE grew  steadily into 1HFY23, with net profit surging four-fold to MYR7.8m on  improved margins and economies of scale – on the back of 79% growth  in revenue, mainly supported by stronger demand for parts and higher  volumes from carmakers.

Balance sheet/cash flow. As of 2QFY23, net gearing was healthy at  0.12x. While proceeds of c.MYR8m from the recently completed private  placement should further improve gearing, there may be some loan  drawdowns for the construction of a new plant in Serendah. ROE is hovering at mid-teen levels in FY23 as the group continues to grow and  improve its profitability.

Dividends. While there is no official dividend policy or consistency in its  dividend track record, we believe there is room for dividend payout in  FY23 onwards, given the expectation of significantly better profitability.

Management. Dr Goh Kar Chun has been the MD since 2016. Prior to  that, he was an executive director since 2008, overseeing the group’s  business development, marketing and sales, production, engineering  and quality assurance functions. He is supported by executive  director/CFO Goh Anne, who is in charge of Finance, HR/Admin and IT,  and COO, Lim Chern Tin.

Investment Case

An OEM with R&D capabilities. Moving forward, earnings should grow  from strength to strength, supported by contracts to supply electronics  and mechatronic components and parts for various car models for  Perodua and Proton. The expansion of its capabilities to become a  modular supplier instead of a component supplier should also improve  client stickiness and margins. The new plant expansion, and additional  projects from both new customers and new models should continue to  drive growth for MCE, in addition to several pull factors from the supply  chain localisation plan under the NAP 2020. Further growth catalysts  stem from its EV venture.

Fair value. Pegged to a target 12-14x P/E on FY23F-24F earnings, fair  value could range between MYR2.98 and MYR4.08. The target P/E is at  a huge discount to its peers in the automotive lighting business and  EMS players. We believe MCE will re-rate with steady earnings  delivery, structural growth in automotive electronic components, and  exposure to the EV space to capture the latest technology trends.  Earnings in the automotive industry are generally of better quality  thanks to the relatively lower volatility in demand and longevity of the  parts (5-10 years). Key risks include escalation of input costs, slower  orders, weaker-than-expected TPV.

Source: RHB Securities Research - 16 May 2023